Bank of Canada seen cutting rates today as loonie tumbles

July 21, 2015 Financial Post

by Cecile Gutscher and Lananh Nguyen, Bloomberg News

Investors are piling into bets against the loonie, signaling growing speculation that Canada’s economy is heading back into recession.

The currency is close to the weakest since 2009 as the Bank of Canada meets Wednesday to decide whether to cut interest rates for a second time this year. The loonie’s decline suggests growing conviction that policy makers will continue to loosen monetary policy in the face of sliding oil prices.

In the futures market, net short positions in the Canadian dollar are the highest since the first quarter, according to data for the most recent week. Hedge-fund manager Patrik Safvenblad is among those expecting to profit from the currency’s drop.

“The biggest position for us is Canada, where the weak commodities story plays out into serious domestic weakness,” said Safvenblad, chief investment officer of Harmonic Capital Partners in London. “Canada is just all black, there’s nothing positive.”

The currency has lost about 15.5 per cent against its U.S. counterpart in the past year, reaching as weak as C$1.2805 Tuesday. It’s plumbing levels last seen in March 2009, the quarter before Canada emerged from recession.

Neighborly Divide

The economy is struggling again while growth in its biggest trading partner, the U.S., rebounds.

Canada’s reliance on commodities importers including China is hurting it more than recovering U.S. demand for finished goods is helping. Crude oil, Canada’s biggest export, is almost 50 per cent cheaper than a year ago.

The Bank of Canada will cut its benchmark rate by a quarter-percentage point Wednesday, after lowering it to 0.75 per cent in January, according to the median estimate in a Bloomberg survey.

“I have maintained Canadian dollar shorts all year, and that is still the case,” Alessio de Longis, a currency strategist in New York at OppenheimerFunds Inc., which oversees about $235 billion, said via e-mail. “I still think Canada will need to cut rates further, possibly to zero.”

Bank of Canada Governor Stephen Poloz said in April that the worst of the oil crash was over and forecast that growth would rebound in the second half of the year. The economy contracted for the fourth straight month in April.

Strength Signals

Rising full-time employment and consumer spending may keep the bank from cutting rates for the time being, said Scott Smith, senior market analyst at Cambridge Global Payments, a global foreign-exchange and payments provider.

“There’re some pockets of strength, and that’s why I think the bank will hold off from cutting rates at this point,” Smith said from Calgary.

The currency has already weakened past the median forecast of economists surveyed by Bloomberg, for it to drop to C$1.28 by year-end. Canadian Imperial Bank of Commerce strategist Jeremy Stretch said he sees the loonie weakening as far as C$1.2960 following a rate cut this week.

Policy makers need to act to prop up growth, said Atul Lele, who manages $2 billion as chief investment officer of Deltec International Group in Nassau, Bahamas.

“You’ve got a decline in commodity prices fueling a decline in national incomes, which has started the way toward quite substantial asset price declines,” Lele said.

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